Tesla’s $7,500 Tax Credit Will Start To Phase Out in 2019

The Tesla Model 3, which starts at $35,000, is the company's most affordable model. The relative net cost of all Tesla cars will go up starting next year, when federal tax credits start to phase out.

Tesla confirmed today that it delivered 200,000 electric cars to buyers in the United States, the first automaker to reach that level of sales. The milestone is a mixed blessing because it means that the $7,500 federal EV tax credit available to Tesla customers will be reduced by 50 percent in six months—and continue to diminish to zero by about January 2020.

General Motors, which sells the all-electric Chevrolet Bolt and Chevrolet Volt plug-in hybrid—as well as the low-volume Cadillac CTG plug-in hybrid—has sold about 184,000 plug-in cars through June. At GM’s current rate of sales, it will likely reach the 200,000 limit by the end of 2018.

The U.S. federal government incentivizes the sales of zero-emission electric cars and plug-in hybrids by providing a tax credit of between $2,500 to $7,500, depending on the vehicle’s battery capacity. The federal credits, established by The American Recovery and Reinvestment Act of 2009, have been available to buyers of electric cars produced after 2010. Since that time, Tesla customers benefitted from the full $7,500 federal tax credit—in addition to any state or local credits and rebates.

The timing will be a challenge for Tesla. The credit for Tesla buyers will start to phase out just as the company is expected to consistently increase production of the Model 3—promised by Tesla as its first so-called affordable, long-range electric car. Given the timing of the tax-credit phase-out, many buyers of the 220-mile-range $35,000 version of the Model 3 (which won’t go into production until early 2019) will not benefit from the full tax credit. Tesla this month said it still has more than 400,000 preorders for the Model 3.

From Jan. 1, 2019 until June 30, the credit for all Tesla vehicles will be reduced to $3,750. Then, from July 1 to Dec. 31, 2019, it will be reduced again to $1,875. Vehicles delivered in 2020 and beyond will not be eligible for any tax credit.

It remains to be seen how the phase-out of tax credits—for Tesla, General Motors, and other companies—will affect EV sales. Tesla sells premium, luxury vehicles—such as the Model S and Model X—and the current 310-mile version of the Model 3 commonly sells for more than $50,000.

Electric cars are more expensive than similar gas-powered vehicles, and buyers of electric vehicles earn much more than the average car buyer. But as more long-range, lower-cost EVs are introduced, it’s uncertain if today’s EV buyers will be any less inclined to buy an EV as a result of reduced federal tax credits—or if they shift their purchase decisions to plug-in cars that still benefit from the incentive.

Nissan and Ford, with about 120,000 and 110,000 cumulative sales respectively, will likely benefit from the full credit for another few years. Similarly, Toyota and BMW—neither which have yet hit 100,000 sales—will remain unaffected by the phase-out for several years.

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